Amphenol Corporation — Fiscal 2010 Form 10-K Summary
Business context and reporting period
Amphenol designs, manufactures and markets electrical, electronic and fiber-optic connectors, interconnect systems, coaxial cable and specialty cable. Its two reportable segments are Interconnect Products and Assemblies and Cable Products. Primary markets include information technology and communications, industrial and automotive, and commercial aerospace and military. This filing covers the fiscal year ended December 31, 2010; it is not a quarterly filing, although unaudited quarterly data are included.
- Approximately 60% of sales came from information technology and communications, 18% from industrial and automotive, and 22% from commercial aerospace and military.
- Approximately 65% of sales were outside the United States; China represented approximately 24% of sales. The largest customer represented approximately 6% of sales.
- The Company operated 243 plants, warehouses and offices and employed approximately 39,100 people worldwide.
Financial performance and position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $3,554.1 million | $2,820.1 million | +26% |
| Gross profit | $1,158.2 million | $886.6 million | +31% |
| Gross margin | 32.6% | 31.4% | +120 bps |
| Operating income | $700.4 million | $488.9 million | +43% |
| Operating margin | 19.7% | 17.3% | +240 bps |
| Net income attributable to Amphenol | $496.4 million | $317.8 million | +56% |
| Diluted EPS | $2.82 | $1.83 | +54% |
| Cash flow from operating activities | $424.9 million | $582.3 million | -$157.4 million |
- Excluding the $82.0 million cash-flow impact from adoption of ASU 2009-16, 2010 operating cash flow was $506.9 million.
- Cash, cash equivalents and short-term investments were $624.2 million at December 31, 2010, versus $422.4 million at year-end 2009. Working capital was $1,337.1 million.
- Total assets were $4,015.9 million, including $1,533.3 million of goodwill. Shareholders’ equity attributable to Amphenol was $2,320.9 million.
- Capital expenditures were $109.5 million, and acquisition-related payments were $180.4 million. Management expected 2011 capital expenditures of approximately $120 million to $140 million.
- Research and development expense increased to $77.6 million from $64.0 million.
Material changes versus the prior comparable period
- Sales increased organically by approximately 22%, with growth across major end markets and geographic regions. Interconnect sales increased 28% in U.S. dollars, while Cable Products sales increased 3%.
- Telecommunications and data communications sales increased approximately $202.7 million; wireless communications increased approximately $181.3 million; industrial increased approximately $163.9 million; military and aerospace increased approximately $125.2 million; and automotive increased approximately $42.8 million.
- Interconnect operating margins improved approximately 2.3 percentage points due to higher volume and cost controls. Cable operating margins declined approximately 1.7 percentage points because of higher material costs and market price reductions.
- SG&A increased to $457.9 million from $397.6 million, but declined to approximately 13% of sales from 14%.
- The effective tax rate declined to 24.3% from 26.7%, primarily due to a $20.7 million benefit from favorable international tax settlements and prior-year audit resolutions. Excluding these adjustments, the rates were approximately 27.4% and 27.5%, respectively.
- Accounts receivable increased to $718.5 million and inventory to $549.2 million. Days sales outstanding increased to approximately 68 days from 64 days, while inventory days improved to 77 from 80.
- The Company completed two significant acquisitions in target military aerospace and industrial markets and invested approximately $180 million in acquisitions, compared with $280 million in 2009.
- Backlog increased to $680 million at December 31, 2010, from $534 million, although the filing cautions that short lead times, cancellations and distributor sales limit its predictive value.
Debt, liquidity, outlook and risks
- Total borrowings were $800.0 million at year-end 2010, including $599.1 million of 4.75% Senior Notes due November 2014, $103.6 million drawn on a $1.0 billion revolving facility, and $92.0 million under the receivables securitization facility.
- Revolver availability was $896.4 million at year-end. The Company was in compliance with its financial covenants. Approximately 25% of borrowings, or $200.9 million, were subject to floating rates.
- Management expected cash, investments, operating cash flow and available credit to fund obligations for the next twelve months. Ongoing cash needs include capital expenditures, acquisitions, debt service, pensions, dividends and potential share repurchases.
- The Company paid approximately $10.4 million in dividends in 2010 and maintained a quarterly dividend of $0.015 per share. A new authorization to repurchase up to 20 million shares through January 31, 2014 was announced in January 2011; no shares were repurchased in 2010.
- Adoption of ASU 2009-16 changed the receivables securitization from sale accounting to secured borrowing, adding $82.0 million of receivables and debt and reducing reported operating cash flow by $82.0 million in 2010.
- Key risks include concentration in communications markets, changes in defense spending, intense competition and pricing pressure, dependence on new product acceptance, foreign currency and international operating risks, raw-material cost volatility, acquisition integration and goodwill impairment, covenant compliance, customer or supplier disruptions, and potential environmental and legal liabilities.
- Contingent acquisition consideration had a maximum undiscounted amount of $59.0 million, with approximately $40.0 million expected in 2011 and $19.0 million in 2012 based on acquired-business performance.
- Known contractual obligations totaled $1.273 billion, including debt, interest on Senior Notes, operating leases, purchase obligations, acquisition-related obligations and pension obligations.
- Environmental remediation costs for three legacy sites were reimbursed by Honeywell under the Honeywell Agreement. Management did not expect environmental matters or ordinary-course litigation to have a material adverse effect.
Most important facts for investors to verify
- Whether the 2010 recovery and organic growth across communications, industrial, automotive and aerospace markets continued beyond the reporting period.
- The sustainability of the 19.7% operating margin, particularly given cable-market pricing and raw-material pressures.
- Underlying earnings excluding the $20.7 million one-time tax benefit and the effect of acquisition-related activity.
- Cash conversion and working-capital trends, including the increase in receivables and days sales outstanding.
- Debt maturities concentrated in 2013–2014, covenant headroom and refinancing requirements for the Senior Notes due in 2014.
- Integration performance and valuation risk associated with acquisitions and $1.533 billion of goodwill.
- Exposure to communications and defense spending, international operations, foreign currencies and material costs.
- Expected timing and conditions for the authorized share repurchase program and the Company’s ability to balance repurchases, acquisitions, dividends and debt repayment.